Systems Design and Management Information, Inc. v. Kansas City Post Office Employees Credit Union

• Decision Date: 16 March 1990
• Docket Number: No. 63849,63849
• Parties: , 11 UCC Rep.Serv.2d 775 SYSTEMS DESIGN AND MANAGEMENT INFORMATION, INC., Appellee/Cross-Appellant, v. KANSAS CITY POST OFFICE EMPLOYEES CREDIT UNION, et al., Appellant/Cross-Appellee.
• Court: Kansas Court of Appeals

Page 878

788 P.2d 878

14 Kan.App.2d 266, 11 UCC Rep.Serv.2d 775

SYSTEMS DESIGN AND MANAGEMENT INFORMATION, INC., Appellee/Cross-Appellant, v. KANSAS CITY POST OFFICE EMPLOYEES CREDIT UNION, et al.,

Appellant/Cross-Appellee.

No. 63849.

Court of Appeals of Kansas.

March 16, 1990.

Syllabus by the Court

1. In determining the law applicable to a controversy, the general rule is that the law of the forum applies unless it is expressly shown that a different law governs, and in case of doubt, the law of the forum is preferred insofar as it does not conflict with constitutional limitations.

2. In determining whether Kansas law is applicable to a controversy, as long as Kansas has significant contact or a significant aggregation of contacts to ensure that the choice of Kansas law is not arbitrary or unfair, constitutional limits are not violated by applying Kansas law.

3. In determining the applicability of the Uniform Commercial Code to a contract for both goods and services, the test is whether the predominant factor or purpose of the contract is the rendition of services, with goods incidentally involved, or is a transaction of sale, with labor incidentally involved.

4. In the case at bar, the sale of the computer software is predominant and services performed by the seller are incidental to the sale of the software. The purchaser purchased only a result of the programmer's skill and the seller remained the owner of the accounting program as intellectual property. Therefore, the computer software sold is held to be goods and subject to the provisions of the Uniform Commercial Code.

William T. Session, of Polsinelli, White, Vardeman & Shalton, Kansas City, Mo., and Bruce W. Beye, of Polsinelli, White, Vardeman and Shalton, Overland Park, for appellant/cross-appellee.

Charles R. Wilson, Overland Park, for appellee/cross-appellant.

Before RULON, P.J., LEWIS, J., and RICHARD W. WAHL, District Judge Retired, Assigned.

RICHARD W. WAHL, District Judge Retired, Assigned.

Kansas City Post Office Employees Credit Union, appeals the trial court's judgment in favor of Systems Design and Management Information, Inc., (SDMI) on its counterclaims for breach of contract and fraudulent and negligent misrepresentation. It also appeals the trial court's application of Kansas law. SDMI cross-appeals on the trial court's entry of judgment for the credit union on SDMI's breach of contract claim.

On November 1, 1986, the Kansas City Post Office Employees Credit Union merged into the Kansas City Telephone Employees Credit Union. The surviving credit union is now called the Communications Credit Union (Credit Union). SDMI develops computer software programs for credit unions, using Burroughs, now Unisys, hardware. SDMI is not a service bureau. It does not furnish computer services from its computer system to credit unions or manage any data on a daily basis. SDMI furnished software to the Kansas City Post Office Employees Credit Union and had an ongoing business relationship with it beginning in 1984. Prior to the merger of the two credit unions, Robert Miller, a salesman for Burroughs, told Davis Tyler, president of SDMI, about the proposed merger and the two developed a proposal in an attempt to get the new credit union's account.

This proposal was jointly offered by SDMI and Burroughs, using the so-called Generic System software, the subject of this litigation, and Burroughs hardware. This proposal was dated November 4, 1986, and contained the following clause:

"The preliminary information and expression of confidence set forth in this recommendation of Burroughs products and/or services are submitted for your consideration and guidance only in the hope that we may be favored with your order. Since this proposal is preliminary only, the order when issued shall constitute the only legally binding commitment of the parties."

Sometime in November 1986, a demonstration of the software was held at SDMI's offices. Daniel Yantis, president and general manager of Credit Union, and Donald Cooper, vice-president in charge of marketing of Credit Union, recommended the purchase of the Generic System software and the credit union board accepted their recommendation. On November 25, 1986, Cooper phoned Davis Tyler of SDMI to say Credit Union would purchase the SDMI Generic System. This agreement between the parties was oral and no written order for the software was ever issued. Credit Union was converted to the SDMI Generic System on February 1-2, 1987.

Immediately, major problems with the system became apparent. Some of the problems included inability to run the payroll, inability to generate certain daily reports, some nonfunctioning printers and terminals, and an inability to perform all the normal operations during regular working hours.

There is disagreement as to the cause of these problems. Ultimately, there were about 11,000 accounts after the merger of the credit unions. The parties disagree as to whether Credit Union disclosed or whether SDMI knew how many accounts the system would have to handle. There is further disagreement whether the number of accounts was misrepresented by Credit Union as 8,000 to 9,000 and whether Credit Union was informed by SDMI that with that number of accounts the system would not work efficiently. In any event, even after discovering that the system would have to handle 11,000 accounts, Cooper recommended that Credit Union proceed with the conversion.

After the conversion, there were many out-of-balance accounts, perhaps thousands. Through the efforts of both parties, the number of out-of-balance accounts was reduced to 293 by March 25, 1987.

On March 23, 1987, a meeting between Cooper and Tyler was held and they signed a "status chart" which outlined the major problems still to be solved by SDMI. This form stated, "When these items have been resolved all monies due SDMI will be paid." Apparently, all the items listed except installing a program to "correct blocking" were performed. The purpose of that program was to speed up the system and to accommodate the total membership of Credit Union. Also on March 23, 1987, Cooper gave Tyler a letter expressing understanding that "few conversions come off without a hitch" and thanking him for SDMI's efforts to deal with Credit Union's problems.

On March 19, 1987, Yantis and Cooper met with representatives of another company seeking software to replace the SDMI Generic System. Credit Union quit using the SDMI software on April 25, 1987, without having notified SDMI that it was switching to another software program.

SDMI filed suit against Credit Union to recover the outstanding indebtedness on the software. Credit Union counterclaimed for damages based upon breach of contract and negligent and fraudulent misrepresentation. The trial court entered judgment in favor of Credit Union on SDMI's cause of action and judgment for SDMI on Credit Union's counterclaim. These appeals followed judgment.

SDMI's business office is located in Kansas. Credit Union's business offices are located in Missouri.

Credit Union argues that the trial court should have applied Missouri law in this case. The trial court applied Kansas law, acknowledging the lex loci contractus principle. The court then found the demonstration of the Generic System was in Kansas, Credit Union telephoned SDMI at SDMI's Kansas office to express intent to purchase the software, and the March 23, 1987, document was signed in Kansas; thus, Kansas law governed.

The actual event which constituted the breach is not clear from the record on appeal or from the journal entry filed by the court. In Shutts v. Phillips Petroleum Co., 235 Kan. 195, 679 P.2d 1159 (1984) rev'd in part on other grounds, 472 U.S. 797, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985), the court stated, "The general rule is that the law of the forum applies unless it is expressly shown that a different law governs, and in case of doubt, the law of the forum is preferred." 235 Kan. at 221, 679 P.2d 1159. Although the choice of law portion of the opinion was reversed in the later United States Supreme Court case, 472 U.S. at 822-23, 105 S.Ct. at 2979-80, the general rule is still applicable insofar as it does not conflict with constitutional limitations. As long as Kansas has " 'significant contact or significant aggregation of contacts' ... to ensure that the choice of Kansas law is not arbitrary or unfair," constitutional limits are not violated. 472 U.S. at 821-22, 105 S.Ct. at 2979. In the case at bar, the contacts with both Kansas and Missouri are numerous, and the choice of one...